FINRA Series 7Investment Information and Suitable RecommendationsMedium
A client owns 100 shares of XYZ stock, currently trading at $60 per share. To protect against a potential decline in the stock's price, the client buys 1 XYZ Put 55 for a premium of $2. What is the breakeven point for this protective put strategy?
- A$53 per share
- B$57 per share
- C$62 per share
- D$55 per share
Show answer & explanationAnswer & explanation
Correct answer: C. $62 per share
The breakeven point for a protective put strategy is the stock's purchase price plus the premium paid for the put option. In this case, the stock was purchased at $60 and the put premium was $2, so $60 + $2 = $62.
Why the other options are wrong
- A. This is the strike price minus the premium, incorrect for breakeven.
- B. This would be the breakeven if the stock was purchased at $55 and the premium was $2, which is not the case.
- D. This is the strike price, not the breakeven for the combined strategy.
Protective Put Breakeven
The breakeven point for a protective put strategy is calculated by adding the premium paid for the put option to the original purchase price of the underlying stock.
- Strategy involves owning stock and buying a put option.
- Protects against downside risk.
- Premium adds to the overall cost basis for breakeven.
Memory trick: Protect your Stock, Add the Put Cost to Break Even.